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COVID-19 ALERT: BUSINESS RESCUE – A POSSIBLE SOLUTION FOR FINANCIALLY DISTRESSED COMPANIES
29 April 2020  | Lourens Swart
 

It is generally accepted that after the current lockdown and beyond, a number of businesses will be financially distressed, and the question is whether business rescue can be a solution.


Business rescue does not only affect the company in financial distress, but also its creditors, and it is therefore important for business owners and management to be aware of what the consequences are if one of your customers were to be placed under business rescue.


A business failure affects employees, shareholders, creditors, a whole supply chain and even communities can be affected when large companies have to close their doors.  The Companies Act provides for a business rescue process in an attempt to rehabilitate a company in financial distress, as an alternative to the liquidation of such a company.


How is a company placed under business rescue?


It can be done in two ways, namely:


  • A resolution by the directors of the company; or

  • A court order.


Who can apply for a court order?


An affected person, such as a shareholder or creditor, registered trade union representing employees or any of the employees of the company can apply for an order to place a company under business rescue.


What are the consequences of business rescue?


Some of the consequences are:


  • Most civil court action against the company is suspended.

  • The disposal of company property is restricted.

  • Company assets can be used to refinance the company.

  • Employment contracts are protected.

  • The business practitioner can suspend or cancel certain contracts.  


Business rescue can therefore create much needed breathing space for a company in financial distress to formulate a business rescue plan. Business rescue brings the creditors of the company to the table (creditors have to approve the business rescue plan) and may lead to a settlement in terms of which a business rescue dividend can be paid, which is more than what a liquidation dividend would have been.  The ultimate goal of business rescue is therefore to ensure that the company in distress is not finally liquidated.


Who is the business rescue practitioner?


  • The business rescue practitioner is appointed by CIPC.  There is a prescribed fee structure, which is based on the experience of the business rescue practitioner. 


  • The Supreme Court of Appeal has recently  held that a success fee, especially if it is not paid by the company under business rescue, but rather by another company in the same group of companies, can be agreed upon, and this creates opportunities to consider alternative fee arrangements.


Business rescue plan


The main duty of the business rescue practitioner is to prepare the business rescue plan, which is in short the plan that must be approved by affected persons to turn around the fortunes of the company.  There is a prescribed process to be followed to have the business rescue plan approved.


Concluding remarks


It is important for a business to know what happens if a customer is placed under business rescue and what your rights and restrictions are.  Can you as a creditor, for instance, proceed against a person or other entity that signed surety for the obligations of the company under business rescue?  Do you, as a supplier, have to continue to supply to the company under business rescue?


A company under financial distress may be saved by making use of the business rescue mechanism, specifically to avoid liquidation and job losses.


If you require any advice in this regard, please contact Lourens Swart* at lswart@psn.co.za or 083 627 6674
(*Lourens has a post graduate diploma in business rescue.)